2022 (6) TMI 286 - HC - Companies Law

Court upholds decision on Auditor's obligations under Companies Act

The Court upheld the Trial Court's decision to take cognizance against the petitioner for the alleged offence under Section 240(3) of the Companies Act. ... Vicarious liability of partner of the firm - separate identity of partnership firm - summons issued to the petitioner - reply to the notice not received - violation of Section 240 (3) of Companies Act - HELD THAT:- It is revealed that the respondent SFIO filed private complaint against the petitioner for the offence punishable under section 240 (3) of Companies Act alleging that the petitioner was appointed as an Auditor of the company and notice was issued by the respondent for furnishing some details of the Company and he has filed to furnish. Therefore the offence was committed by the petitioner, hence liable for punishment and penal action. A partnership firm is not a corporate entity, it does not have a separate legal persona and this has several important legal consequences in the relationship between the parties all rights and duties only exist between the parties, inter se the right and duties of the partnership are the rights and duties of the partners for as per the partnership deed. Therefore, a partner cannot be bifurcated from a firm, for example for a firm minimum two partners are required, if one partner is retired either by resignation or by death, the firm becomes a proprietorship. Therefore, merely the petitioner running a firm in the name of N.D.S. & CO., but it is not a legal entity and it cannot be placed on par with the companies which is registered under the Companies Act - A partnership firm is not a separate legal entity distinct from its partner it is merely a collective name given to the individuals composing it and even as per the definition of the Indian Partnership Act, as person who have entered into partnership with one another called individually 'partners' and collectively 'a firm' and the name under which their business is. If an offence committed by the firm, is also an offence committed by the partners, it cannot be bifurcated as partners and the firm - the Trial Court, rightly took the cognizance against the petitioner for the offence punishable under section 240(3) of Companies Act. Criminal petition dismissed. Issues:Petition to quash criminal proceedings under Section 482 of Cr.P.C for alleged violation of Section 240(3) of the Companies Act, 1956.Analysis:1. The petitioner argued that without making the firm an accused, he cannot be prosecuted for the alleged offence under Section 240(3) of the Companies Act. The petitioner contended that as a partner in the firm, he cannot be vicariously held liable for penal provisions.2. The respondent countered, stating that the petitioner, being a Chartered Accountant and an Auditor appointed by the Company, is obligated to provide information to investigating agencies under Sections 239 and 240 of the Companies Act. The respondent argued that the petitioner's failure to furnish information led to the criminal complaint against him.3. The Court analyzed Section 226 of the Companies Act, which outlines the qualifications and disqualifications of auditors. It was noted that the petitioner, as a Chartered Accountant running a firm, was appointed as an auditor by the resolution of the Company, meeting the eligibility criteria under the Act.4. The Court considered precedents, including the Supreme Court's ruling in Aneeta Hada's case, emphasizing that without making the Company an accused, individuals like Directors cannot be held liable for the company's offences. The Court also examined the judgment in CBI Vs. K. Narayana Rao, highlighting the distinction between legal advisors and statutory auditors.5. The Court deliberated on the nature of partnership firms, emphasizing that a partnership firm does not have a separate legal persona distinct from its partners. It was clarified that partners in a firm collectively constitute the firm, and any offence committed by the firm is attributed to the partners collectively.6. Ultimately, the Court dismissed the petitioner's argument that he cannot be prosecuted without making the firm an accused. It concluded that as an Auditor appointed under the Companies Act, the petitioner had statutory duties to provide information as required by investigating agencies. Therefore, the Trial Court's decision to take cognizance against the petitioner for the alleged offence under Section 240(3) of the Companies Act was upheld, and the criminal petition was dismissed.